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The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector

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  • Ryland Thomas

Abstract

This paper is the second part of a study on the determinants of the broad money aggregate M4, following a similar analysis of the personal sector developed in Working Paper No 61. It models the broad money holdings of both industrial and commercial companies (ICCs) and other financial institutions (OFIs) in the UK, and examines what role they play in the transmission mechanism. ICCs are shown to have both a transactions and a portfolio motive for holding money. A three-equation model of money, investment and the cost of capital is estimated, and the results suggest the existence of a corporate sector liquidity channel whereby firms' "excess" money balances have a negative influence on the cost of capital and a positive impact on investment spending. OFIs' money holdings are shown to depend upon wealth and relative rates of return, in line with standard portfolio models of money demand. But as OFIs are the chief counterparts to banks' liability management activity, their money holdings are also modelled jointly with deposit rates.

Suggested Citation

  • Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers 62, Bank of England.
    • Handle: RePEc:boe:boeewp:62
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1997/wp62.pdf
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    References listed on IDEAS

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    Cited by:

    1. Giuseppe Ferrero & Andrea Nobili & Patrizia Passiglia, 2007. "The sectoral distribution of money supply in the Euro area," Temi di discussione (Economic working papers) 627, Bank of Italy, Economic Research and International Relations Area.
    2. K Alec Chrystal & Paul Mizen, 2001. "Consumption, money and lending: a joint model for the UK household sector," Bank of England working papers 134, Bank of England.
    3. Colin Ellis, 2006. "Elasticities, markups and technical progress: evidence from a state-space approach," Bank of England working papers 300, Bank of England.
    4. James Cloyne & Ryland Thomas & Alex Tuckett & Samuel Wills, 2015. "An Empirical Sectoral Model of Unconventional Monetary Policy: The Impact of QE," Manchester School, University of Manchester, vol. 83, pages 51-82, September.
    5. Giuseppe Ferrero & Andrea Nobili & Patrizia Passiglia, 2011. "Assessing excess liquidity in the euro area: the role of sectoral distribution of money," Applied Economics, Taylor & Francis Journals, vol. 43(23), pages 3213-3230.
    6. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector," Bank of England working papers 61, Bank of England.
    7. Cloyne, James & Thomas, Ryland & Tuckett, Alex & Wills, Samuel, 2015. "A sectoral framework for analyzing money, credit and unconventional monetary policy," Bank of England working papers 556, Bank of England.
    8. K. Alec Chrystal & Paul Mizen, 2005. "Other financial corporations: Cinderella or ugly sister of empirical monetary economics?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 63-80.
    9. Norbert Janssen, 1998. "The demand for M0 in the United Kingdom reconsidered: some specification issues," Bank of England working papers 83, Bank of England.
    10. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.
    11. Calza, Alessandro & Sousa, João, 2003. "Why has broad money demand been more stable in the euro area than in other economies? A literature review," Working Paper Series 261, European Central Bank.
    12. Shamik Dhar & Stephen P Millard, 2000. "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England.

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